There is a slow moving time bomb coming in the world of retirement planning, and it’s important for everyone to understand what’s happening so that they can avoid becoming a victim. The time bomb is that the traditional “3-legged stool” of retirement planning is quickly crumbling away, and it doesn’t currently appear as if anything is coming to replace it.

The first leg (Social Security) is still there. Unfortunately, a sort of grand experiment has been going on for the past couple of decades for the second leg of the stool (Defined Benefit pension plans), which have been quickly disappearing to the point where they are pretty much obsolete other than for government workers. The thinking was that they could be replaced by a beefed up third leg of the stool (Personal Savings) in the form of 401(k) plans, but this “401(k) experiment” appears to be failing.

It was never supposed to be this way. The 401(k) was a little known provision added to the Internal Revenue Code around 1980, originally designed to allow executives to defer tax on some of their bonuses until they retired. But once it became clear that this provision could be used as a tax deferral vehicle for the regular wages of any employee, the modern 401(k) as we know it was born.

There was massive growth in the use of 401(k)’s over the ensuing decades, at the same time that employers were turning away from Defined Benefit Plans in record numbers. Fast forward to the situation today, where most workers in the U.S. have no Defined Benefit Pension whatsoever, and will have to rely solely on Social Security for their retirement income… along with whatever they have in their 401(k) or other personal savings.

This has created a tremendous change whereby responsibility for retirement planning has now shifted directly onto the shoulders of workers themselves… and the results don’t look good. Studies show that the average balance in a 401(k) is less than $100,000. But the true situation is actually far worse than that, because the averages are greatly skewed upward by the relatively few workers at the top who have very large balances.

The median balance, (half higher, half lower) even for workers in their late 50s, is less than $20,000.
Even more shocking, fully half of working families have no 401(k) savings at all.

There are many reasons for this. More people are working as independent contractors rather than employees. People are changing jobs more often, and/or feel like they can’t afford to save anything in their 401(k). People put it off, thinking that they’ll just get around to it at some better time in the future. And some employees don’t even have access to a 401(k) at all. For a variety of reasons, there is a massive shift going on where a relatively small number of workers at the top (the “Top 10”) have large balances, while the vast majority of people have far too little in their 401(k)’s.

The result of all this is that if people don’t pay attention to their 401(k) plans, they could be left with little more in retirement than their Social Security Benefit…which on average is about $1,400/month. Does that sound like a great retirement? For a shocking number of people, this is going to be reality for them. Even if they have a 401(k) with a balance of, say, $150,000, that should only be expected to provide an additional $6,000-8,000/yr. of retirement income, if they want it to last their entire lives and keep up with inflation. Especially if they retire with any debt, that is likely to just not be enough. This is the looming 401(k) retirement crisis that the country is facing. How can you avoid becoming a victim?

Here are the steps you should follow:

1. Enroll in your 401(k) ASAP. Ask your employer as soon as you take
a new job, and make sure you start on the very first day of eligibility.

2. If you are self-employed, look at some of the other options that are available to do on your own, such as a SEP-IRA (simplified employee pension) or an Individual 401(k).

3. Make sure you put enough away.For most people that means about 10-15% of their salary, at least. Don’t short change yourself by putting only enough in to get the employer match…you’re only hurting yourself with that strategy.

4. Look at the investment options carefully, and consider choosing some that offer the potential for future growth. Don’t put all your eggs in one basket with company stock or unbalanced fund choices.

5. When you change jobs, don’t ever spend the money you’ve accumulated in your former employer’s 401(k)…consider rolling everything to an IRA so it can keep growing vs. rolling it into your new employer’s 401(k). Follow that procedure with every job you ever take to help you build a nest egg.

6. Review your 401(k) on a regular basis to make sure it’s still doing what it’s supposed to do and balanced appropriately, based on your age and risk tolerance.

7. If you are 5 to 10 years out from retirement, and have not already met with an advisor to review your 401(k) allocations and financial goals, now is the time to do so to help ensure you are on the right track.

It doesn’t look like there’s any going back to the world of Defined Benefit Plans. Like it or not, it’s now your own responsibility to be aware of the changing landscape and that means paying attention to your 401(k). Although your company may provide the 401(k) to you as an employee, ultimately you are responsible, not your employer, to ensure you are saving enough in your plan for retirement. Working with an advisor can help ensure you have set and followed realistic goals. Your retirement lifestyle will probably depend on it!

Alex Menassa, MT, CPA

Alex Menassa, MT, CPA is a Senior Financial Advisor at Szarka Financial. Specializing in tax and estate planning issues related to IRAs, Alex is frequently called to speak to employees at some of the area’s largest companies.

In our book, Money Talks: Life Lessons to Help You Plan Now, Save Wisely, and Retire Well, you’ll find many stories of people from all walks of life as they navigate the different stages of life. These stories will help illustrate key aspects of financial planning, showing you what to do—and what not to do—as you go through life.

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